Stocks, Bonds, and Gold

BUSI 721
Jones Graduate School of Business
Rice University

Kerry Back

Let’s calculate optimal portfolios for stocks, treasury bonds, corporate bonds, and gold based on historical means, standard deviations, and correlations.

We’ll look at indices from 1968 and ETFs from 2004.

Reliability of parameter estimates

Large standard errors
Parameters may change over time
- Turbulent and calm markets
- Past 5-year return is a weak predictor of the mean. Other weak predictors
- Correlation between Treasuries and stocks seems to have changed over time.
  - Positive in 1900s (inflation shocks?)
  - Negative in 2000s (no inflation shocks?)

Optimal portfolios

Indices

ETFs